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FMA, RBNZ disappointed by life insurers' response; $1.4m of issues found

Tuesday 17th September 2019

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Sixteen New Zealand insurers have identified more than 75,000 customer issues valued at least $1.4 million but regulators still say they are disappointed by the life insurance industry's response to their conduct and culture review.

"Overall, the regulators were disappointed by the responses. Significant work is still needed to address the issues of weak governance and ineffective management of conduct risk," the Financial Markets Authority and the Reserve Bank of New Zealand say in a joint statement.

The two regulators, which respectively govern conduct and prudential standards, began their review last year in the wake of scandals emerging from Australia's royal commission into financial services.

The industry's economic significance is far from small: there are about four million life insurance policies in force with annual premiums totalling $2.57 billion.

Commerce and Consumer Affairs Minister Kris Faafoi says consumers deserve better from the industry. The government has been working to fast-track measures to improve conduct in the financial sector and will be announcing action shortly, he said.

The Financial Services Council which represents the industry acknowledges its members need to do better. While the regulators talk about a  disappointing response, the FSC claims "good progress."

FSC chief executive Richard Klipin says the industry needs to "continue to work with urgency and focus to build the trust of stakeholders and to ensure we are serving New Zealanders in a fair and transparent way."

FMA chief executive Rob Everett says while he's disappointed, he isn't surprised.

"The responses confirm what we found in our original review. It is clear that progress has been slow and not as far-reaching as required."

RBNZ governor Adrian Orr calls the industry's response "underwhelming." 

"The sector has failed to demonstrate the necessary urgency and prioritisation around investment in systems to provide effective governance and monitoring of conduct risk."

The regulators say the response from the industry varied widely in quality and in the depth of the systematic review of policyholders and products.

"Some did not complete the exercise and others did not provide data on the number of policyholders affected or the estimated cost of remediation activities," they say.

In January this year, the FMA and RBNZ said the life insurance industry is vulnerable to misconduct, is ignoring whether its products are suitable for customers and is too slow to make changes.

The FMA had already concluded that only 2 percent of sales of life insurance policies are genuinely new, rather than just churn, or switching customers between policies to generate income for life insurance agents.

The January report showed commissions to salespeople in New Zealand amount to about 25 percent of total premiums paid each year, far higher than in other countries – Mexico and Hungary are the next highest at about 15 percent with Australia at about 12 percent and the United States about 9 percent.

Today, the regulators noted that although some insurers have committed to removing sales incentives for employees and their managers, not all committed to removing or altering indirect sales incentives.

"Those providers that have removed sales incentives for employees don't typically use external advisors to distribute products. Providers using external advisors told the regulators that changing long-held business arrangements and distribution models is difficult and will take time to implement," they say.

Everett says the FMA is ready to work with life insurers "but we do not think high up-front commissions create confidence that insurers and advisers are acting in the best interests of customers."

Orr says that good governance requires effective management of conflicts of interest. "We need to see much better systems and controls in place to manage the inherent conflicts where advisors or sales staff are offered incentives to sell or replace insurance policies."

Firms that have not undertaken systematic reviews to identify issues and develop remediation plans have been given until December to do so.

"The FMA and RBNZ will continue to monitor how the insurers are responding to recommendations and implementing their work plans," they say.

"Life insurers are currently not legally required to become more customer-focused and the FMA and RBNZ found that the sector has a weak appetite for change.

"Deficiencies in some of the plans received and some insurer's lack of commitment to implementing the regulators' recommendations further demonstrates the need for additional obligations to be included in the regulation of conduct of life insurers."


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